Morgan Stanley: Banks Take on Zero Hedge

By Mark Gongloff

Bloomberg

One of the things crushing Morgan Stanley’s share price yesterday was talk about its heavy exposure to Europe. Analysts are rushing to its defense.

Credit Suisse analysts yesterday took the unusual step of referencing a blog post, namely a Zero Hedge post suggesting Morgan Stanley’s exposure to French banks was 60% greater than its market cap and more than half the firm’s book value.

Late yesterday, Credit Suisse wrote:

Updated Thoughts on Morgan Stanley European Exposures. Following a report by Zero Hedge posted earlier today that highlights Morgan Stanley’s sizeable exposure to French banks and subsequent 7% decline in the shares, we provide our thoughts on the firm’s European exposures, point out some important factors to consider in the Federal Financial Institutions Examination Council’s (FFIEC) exposure data and size a potential hit to Morgan Stanley’s capital base in a downside scenario. Bottom line: We see today’s share weakness as overdone. We view peripheral Morgan Stanley’s European exposures as manageable given their size (both gross and net) and the firm’s strong capital base (14.6% Tier 1 Common on a Basel I basis, 7% on a Basel III basis). Equally as important, we take some comfort in the important changes to collateral and risk management by Morgan Stanley and financial peers since the 2007/2008 crisis and believe any Eurozone concerns should not be a new or incremental surprise.

Okey-doke.

Today, Alliance Bernstein analysts joined the fray with a note of their own, a full copy of which which Zero Hedge helpfully provides:

On closer review, many of the numbers articulated by the media reflected data from Morgan Stanley’s201010-K derived from its December31, 2010filing to the Federal Financial Institutions Examination Council (FFIEC). Morgan Stanley’s year-end 2010 FFIEC 009afiling shows the firm had total cross-border exposure to France of $44.7 billion, including $39.1 billion to French banks and $2.5 billion to other French domiciled entities.

To be sure, this is a significant value relative to Morgan Stanley’s tangible book value of $51.3 billion as of June 30, 2011. We note, however, in accordance with the FFIEC’s instructions, firms are required to report this disclosure including all cash, customer receivables, reverse repo positions, securities borrowed and cash trading instruments on a gross basis. This reported exposure greatly increases the value reported by MS because it includes all funds held in French bank accounts (including its client funds),the firm’s gross reverse repo positions and gross security borrows. As such, the report excludes net repo positions by counterparties and collateral posted to Morgan Stanley during a trade.

Over the last six months, there have been 5,600+articles published by the press on the subject of “French Banks” and “Credit Risk”. We believe Morgan Stanley’s risk management staff and its trading units are fully aware of the highly publicized risks emanating from Europe and warnings about the firm’s potential exposure to a European Sovereign crisis. There is solid evidence that shows Morgan Stanley has been taking action to limit risk in preparation for potentially difficult market conditions ahead. Based on the most recent FFIEC 009a report, Morgan Stanley has decreased its exposure to France by 34%, falling from $44.7 billion to $29.3 billion.

The notes aren’t helping; Morgan Stanley shares are down nearly 2% before the opening bell.

Goldman is down a similar amount. Both had their third-quarter estimates cut this morning by JMP Securities Analyst David Trone.

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